Bank Reconciliation

A statement of reconciling the balances between bank book and bank statement is called bank reconciliation statement. Bank book is maintained by the customer or account holder in his/her (usually business firm) books of accounts and bank statement is prepared by bank in its own books of accounts. Ideally the two parties work as debtor and creditor and balances in both parties’ books must be same at a particular date. Factually it does not happen in reality. The reasons behind are explained below:

• The cheques issued by the customer are credited in bank book as payment from bank account but the bank does not debit the customer account until the cheque is presented by the party in whom favor the cheque was issue. This creates the discrepancy in balances and balance in bank statement remains overstated.

• The cheques collected from the customers are deposited into bank account and debited in bank book but the bank does not credit the account holder account until the cheques are actually cleared from the account of the party who issued the cheque. This also creates a discrepancy and balance in bank statement remains understated.

• Bank deducts charges against services provided to the account holder and debit the account occasionally but these deductions remain unattended by the account holder in bank book. This creates a discrepancy in balances and the bank book remains overstated.

• Some times upon standing instructions of the account holder the bank debit the customer account with payment of any expense of the account holder such as insurance etc. Occasionally this payment remains unattended by the account holder in bank book. This creates a discrepancy in balances and the bank book remains overstated.

• In most of the instances bank credit the profit earned on deposits especially in the saving accounts and are not communicated to the account holder. This creates the discrepancy in balances and balance in bank statement remains overstated.

• In numerous cases direct deposits in the accounts are made by some customers for payments or companies in which there is an investment for dividends. The bank credit the account with the amount and this amount remains unattended in bank book. This creates the discrepancy in balances and balance in bank statement remains overstated.

To reconcile the above difference between two balances a statement is prepared containing two balances and addition/subtraction of the differences. This statement is termed as bank reconciliation statement.

How to Prepare Bank Reconciliation Statement

Following are the main steps to be followed to build a bank reconciliation statement.

• Determine the date at which the two balances are required to be reconciled which is usually the last day of the financial year.

• Request the bank to provide bank statement for the period since balances where previously reconciled to the date determined in first step.

• Get the bank book for the same period for which the reconciliation is intended to be prepared.

• Keep both documents at the table. Pick the amounts from debit and credits columns of the bank book in chronological order and find in the bank statement. Figures picked from the debit column of bank book are to be located in credit column of the bank statement and vice versa.

• Tick/check the figures if found in both documents.

• At the end of this exercise some of the figures will remain unchecked in both documents. These are actually the differences needed to be reconciled and would probably fall under one or more of above categories of differences.

• A reconciliation statement is to be buildup to reconcile the difference in both the balances.

• The balance as per bank book is presented at the top of statement.

• The cheques issued to the parties but still not presented by them are added back to the balance.

• The cheques collected and deposited in the bank account but still not cleared by the bank of customer are subtracted.

• The bank charges deducted by bank against services are also deducted.

• Any other credit made by the bank in the bank statement and falls in the differences is added in the balance.

• Any other debit made by the bank in the bank statement and falls in the differences is deducted from the balance.

• Any other debit made in bank book and falls in the differences is subtracted from the balance.

• Any other credit made in the bank book and falls in the differences is added in the balance.

Benefits of Bank Reconciliation Statement

Some companies prepare bank reconciliations on monthly basis. The reason behind this reconciliation statement enables to identify the hidden charges the banks some times debit their account. Companies can locate such deductions and negotiate with banks to consider such charges. Moreover bank reconciliation statement also enable a company to locate the errors if any in bank book or bank statement. There may be some transactions missing at all or some amounts misused or embezzled, the reconciliation statement can highlight such issues. The auditors require the preparation of bank reconciliation as compulsory tool for ensuring internal controls.